Joe Sciacca

Market update

Looking back

The Dow Jones Industrial Average logged its fastest thousand-point gain in history

Over the past year, the Dow has surpassed five, thousand-point milestones — a record for the 120-year old stock market barometer

Since March 2009, the S&P 500 Index has advanced more than 300%

Up ahead

Favorable corporate and economic trends across the globe could accelerate in 2018

The benefits from corporate tax reform could increase profitability for many U.S. companies

Although optimism runs high, investors should maintain a well-diversified portfolio

Data Source: FactSet

Market Update: Your portfolio in the new year

With the arrival of the new year, investors are reevaluating their investment strategies. How can you help position your portfolio based on market conditions?

Stocks benefit from strong tailwinds

Asset prices are ringing in the new year much in the way they finished 2017— up and to the right. Just days into 2018, the S&P 500 Index, Dow Jones Industrial Average and Nasdaq hit fresh all-time highs.

In our view, global stocks still have some gas left in the tank. We are forecasting that the S&P 500 Index will climb 7.5% compared to the end of 2017 – finishing at a level of 2875. That’s healthy, but also far below what the market delivered in 2017. We believe synchronized global growth, better corporate earnings trends, rising confidence levels, and potential benefits from the new tax reform package all point to a healthy environment for equity prices this year. Be advised, however, that some of these factors may already be reflected in current stock prices.

Earnings continue to ramp up

Per the financial research firm FactSet, the estimated 2018 full-year earnings per share (EPS) growth rate for companies in the S&P 500 is 11.8% year-over-year. If full-year earnings expectations are achieved, it would mark the highest annual earnings growth rate for S&P 500 companies since 2011. Under the hood, all eleven sectors are projected to report growth in earnings, led by Energy, Materials, Financials, and Information Technology.

Importantly, if aggregate earnings and revenue estimates are realized this year, S&P 500 profit margins could also reach a highwater mark.

According to FactSet, the projected net profit margin for S&P 500 companies is +10.9% for this year. This would represent the highest level since 2008, when FactSet began tracking earnings and revenue data.

It is also worth noting that these estimates do not largely incorporate reforms from the Tax Cuts and Jobs Act. With the lower corporate tax rate this year (dropping from 35% to 21%) and changes to the tax structure for many multinational companies, we believe full-year earnings estimates for 2018 could move even higher through the first quarter.

Stay diversified and think globally in 2018

As the year gets underway, growth and momentum stocks could continue to capture the bulk of investor interest. Conversely, high dividend yield and low price-to-earnings (P/E) stocks may see little investor interest if the market continues to rise.

Volatility was contained last year thanks to consistently positive news on the economy and corporate earnings. Although we begin 2018 with similar conditions, they aren’t etched in stone for the entire year. Markets could turn more volatile, particularly if the Federal Reserve’s interest rate hikes and other monetary tightening measures continue and there is a drop-off in market liquidity.

The degree in which corporate tax reform boosts profitability could also play a significant role in stock prices this year, particularly given their elevated valuations.

With this backdrop in mind, consider incorporating the following guidance when making adjustments in your portfolio for 2018:

At this point in the business cycle, maintain balance across investments and avoid becoming overly bullish on the prospects for “outsized” stock gains.

While it’s important to maintain a healthy dose of U.S. equities in your portfolio, relative value appears more attractive in Europe ex-U.K. and Asia. Compared to the U.S., we believe valuations are more attractive and monetary conditions easier.

We are also more favorable on U.S. small-cap stocks. These domestic companies typically face high corporate tax rates and could be beneficiaries of the relief that tax reform provides.

From a sector perspective, investors should favor cyclically exposed areas of the market over defensive areas but not to a significant degree. Financials, Materials, and Health Care appear to be the best-positioned sectors at this time.

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Standard & Poor’s (S&P) 500 IndexThe S&P 500 is a basket of 500 stocks that are considered to be widely held. The S&P 500 index is weighted by market value (shares outstanding times share price), and its performance is thought to be representative of the stock market as a whole. The S&P 500 index was created in 1957 although it has been extrapolated backwards to several decades earlier for performance comparison purposes. This index provides a broad snapshot of the overall U.S. equity market. Over 70% of all U.S. equity value is tracked by the S&P 500. Inclusion in the index is determined by Standard & Poor’s and is based upon their market size, liquidity, and sector.

Dow Jones Industrial Average The Dow Jones Industrial Average (The Dow), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.

Russell 2000 Index The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set. The Russell 2000 includes the smallest 2000 securities in the Russell 3000.

MSCI EAFE IndexThe MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following 21 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. As of June 2, 2014.

MSCI Europe Ex UKThe MSCI Europe ex UK Index captures large and mid cap representation across 14 Developed Markets (DM) countries in Europe. With 337 constituents, the index covers approximately 85% of the free float-adjusted market capitalization across European Developed Markets excluding the UK.

MSCI United KingdomThe MSCI United Kingdom Index is designed to measure the performance of the large and mid cap segments of the UK market. With 109 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the UK.

Bloomberg Commodity IndexFormerly known as the Dow Jones UBS Commodity Index. The Bloomberg Commodity Index is calculated on an excess return basis and composed of futures contracts on 22 physical commodities. It reflects the return of underlying commodity futures price movements.

Dow Jones U.S. Select REIT IndexThe Dow Jones U.S. Select REIT Index intends to measure the performance of publicly traded REITs and REIT-like securities. The index is a subset of the Dow Jones U.S. Select Real Estate Securities Index (RESI), which represents equity real estate investment trusts (REITs) and real estate operating companies (REOCs) traded in the U.S. The indices are designed to serve as proxies for direct real estate investment, in part by excluding companies whose performance may be driven by factors other than the value of real estate.

It is not possible to invest directly in an index.

IMPORTANT DISCLOSURES

The views expressed in this publication reflect the personal views of the Ameriprise Financial Services analyst authoring the publication. The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

Information provided by third parties is deemed to be reliable but may be derived using methodologies or techniques that are proprietary or specific to the third-party source.

DISCLAIMER SECTION

Indexes are unmanaged and are not available for direct investment.

Diversification does not assure a profit or protect against loss.

Investments in small-cap companies involve risks, including volatility, that are greater than investments in larger, more established companies.

In general, equity securities tend to have greater price volatility than debt securities. The market value of securities may fall, fail to rise or fluctuate, sometimes rapidly and unpredictably. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole.

International investing involves certain risks and volatility due to potential political, economic or currency instabilities and different financial and accounting standards.

Except for the historical information contained herein, certain matters in this report are forward-looking statements or projections that are dependent upon certain risks and uncertainties, including but not limited to, such factors and considerations as general market volatility, global economic and geopolitical impacts, fiscal and monetary policy, liquidity, the level of interest rates, and historical sector performance relationships as they relate to the business and economic cycle.

Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value. Neither Ameriprise Financial, nor any of its advisors or representatives, provides tax advice.